MCS CH 13 PPT Fix

CORPORATE GOVERNANCE
AND
BOARDS OF DIRECTORS
By:
Artika Indahsari 2017310023
Cornelia Oribel 2017310029
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“
“Corporate governance is the set of processes,
customs, policies, laws, and institutions
affecting the way a corporation is directed,
administered or controlled. Corporate
governance also includes the relationships
among the many stakeholders involved and the
goals for which the corporation is governed”
FENOMENAS
In Anglo-American economies, In some Western European
the primary governance and Asian economies,
mechanisms are provided by relatively more governance
equity markets and the influence is provided by
structures that support them or concentrated ownership
result from them. These include patterns, such as the Keiretsu
laws and regulations, boards of
in Japan, the Chaebols in
directors, external auditors,
Korea, institutional investors
governance ratings, and
in India, and state ownership
takeover threats.
in China.
CORPORATE GOVERNANCE
Corporate Corporate In the meantime,

governance is governance focus is regulations are
broader than on controlling the frequently
management behaviours of top changing.
control, also management, and Corporations and
covering control through their boards of directors
over top direction, those of must do the best
management all the other they can in
employees in the environments that
firm are often dynamic
Corporate
governance
systems and
management
control systems
(MCSs) are
inextricably linked
A corporate governance focus is slightly broader than a MCSs focus
The links between corporate governance and MCSs are obvious.

Changes in corporate governance mechanisms and practices will usually
have direct and immediate effects on MCS practices and their
effectiveness.
Laws and Regulation
Two corporate governance orientations:
1. Anglo-American system
Focuses on the primacy of shareholders as the
beneficaries of fiduciary duties.
2. Continental European/Japanese system
A broader concern for the rights of other
stakeholders.
The Sarbanes-
Oxley Act
Sarbanes-Oxley is the most significant piece of
legislation affecting corporate governance practices to
be passed in the US since the Securities Act of 1934,
and it has control implications beyond US borders.
The goals:
1. To improve the transparency, timeliness, and quality of financial
reporting.
2. Regulation of auditing, independence of audit committees, in-
control rules (related to effectiveness of these controls).
A Summary of Some of The Key Provisions of SOX.
Among Other Things:
The external auditing The members of audit Senior company managers,

industry, which was committees of usually the CEO and CFO, are
formerly self-regulated,
companies’ boards of required to certify that they
became highly regulated directors are required to had reviewed their
by the federal be independent and company’s quarterly and
government financially literate annual financial statements
Boards of Directors
Boards of directors have a fiduciary duty to
foster the long-term success of the
corporation for the benefit of shareholders,
and also sometimes for debt holders.
ELEMENTS
Duty of care Duty of loyalty Duty of good faith Duty not to waste
duty to duty to advance duty to be faithful and duty to avoid
make/delegate
corporate over devoted to the interests deliberate
decisions in an
informed way personal interests of the corporation and destruction of
its shareholders shareholder value
Boards must be
independent and
accountable to
shareholders, and they
must exert their
authority for the
continuity of executive
leadership with proper
vision and values
Two Main Control Responsibilities
Safeguard the equity investors’ interest, particularly by

1 ensuring that management seeks to maximize the value of
the shareholders’ stakes in the corporation
2 Protect the interests of other corporate stakeholders by

ensuring that the employees in the corporation act in a
legally and socially responsible manner
Basic Principles
board members
Step 01 comply with the
should try to
Step 02
relevant laws and
follow what they
regulations
believe to be best
practice
Audit Committees
In The Financial Reporting Area In The Corporate Governance Area In The Corporate Control Area
audit committees provide audit committees provide audit committees monitor

assurance that the company’s assurance that the the company’s management
financial disclosures are corporation is in compliance and internal control systems
reasonable and accurate. with pertinent laws and that are designed both to
regulations safeguard assets and to
employ them to achieve
established goals and
objectives
Independence from management,
in both fact and appearance, is When independence is lacking,
one essential – and, in many employees and auditors will be
countries, legally required – reluctant to bring serious problems to
characteristic of an audit the committee’s attention, and the
committee. Before SOX was committee’s effectiveness will be
passed in the United States, severely undermined. But other
company CEOs were known to factors, such as directors’ financial
select the audit committee expertise and tenure, also affect the
members, determine their strength of the safeguards that audit
rotation policies, define their committees provide.
duties, routinely attend their
meetings, and review and approve
reports given to the audit
committee.
• Gain support and direction from the entire board of directors.
• Use agendas and follow formal work programs; keep minutes of meetings and
distribute them to the full board of directors; schedule meetings in advance so
participants have time to prepare
• Have at least three members, but not too many more so that all members can
be active participants
• Ensure that the committee is comprised of the “right” individuals.
• Meet at least four times per year, including a pre-audit meeting and a post-audit
meeting.
• Send a clear instruction to the independent auditor that the board of directors,
as the shareholder’s representative, is the auditor’s client and that management
is not.
• Review all financial information; review interim, as well as annual, financial
reports.
• Discuss with the independent auditor their qualitative judgments about the
appropriateness, not just the acceptability, of the organization’s accounting
principles and financial disclosure practices
• Go beyond a “check-the-box” orientation to compliance with legal requirements.
• Be proactive.
• Secure access to resources as needed.
Compensation committees deal
with issues related to the
compensation and benefits
provided to employees,
particularly top executives. In
some companies, the
compensation committee also
provides oversight regarding
the design and operation of
retirement plans, although in
other companies this function is
delegated to an investment
committee of the board.
Some of this criticism stems from the large
compensation, severance, and/or retirement
packages that have been offered to top executives.
Thanks!
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CORPORATE GOVERNANCE

Corporate Corporate In the meantime,

The links between corporate governance and MCSs are obvious.

The external auditing The members of audit Senior company managers,

Safeguard the equity investors’ interest, particularly by

2 Protect the interests of other corporate stakeholders by

audit committees provide audit committees provide audit committees monitor

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